Stock Out Of Buying Area? Watch For Flat Base To Form

Don't despair if your stock has broken out of a base and climbed out of range before you had a chance to hit BUY.

In many cases, stocks break out of longer, deeper patterns such as double-bottom or cup-type bases, run up a ways and then go sideways for a bit. This is when flat bases usually take shape, setting the stage for the next leg up.

Flat bases form over at least five weeks, starting from the first down week after a high. They usually feature a correction of 10% to no more than 15% from the highest point in the pattern. A rectangle can typically be drawn around the pattern.

Such tight trading is bullish, especially if it comes during a market correction, because it signals institutional support.

The buy point is 10 cents above the peak of the left side of the pattern, and the breakout should occur in volume that's at least 40% above its 50-day average.

BlackBerry (BBRY) shaped a pair of flat bases in mid- and late 2003, after the stock had suffered through a devastating correction amid the dot-com bust.

The first base started forming in late June that year, after a nice advance followed a breakout from a cup-type base. The buy point was at 23.58. The pattern formed over five weeks and showed a correction of 15%. As such, it was too short and shallow to be a cup with handle or double-bottom base. Both form over at least seven weeks and correct 20% to 30% or more.

In the week ended June 27, the stock fell just 1% as volume jumped higher than average 1. Since the stock finished in the upper half of the weekly price range, the bullish action indicated that institutions were supporting the stock. This is called accumulation.

The breakout came in the week ended Aug. 1, when the stock rocketed 19% in huge volume. After a brief pullback, BlackBerry rode up its 10-week line, doubling in just three months. Then the second flat base formed.

This pattern also showed the tight trading typical of a flat base. This time, the base formed over six weeks and had a correction of 13%. It wasn't a classic flat base, as the stock briefly topped the buy point in the fourth week before reversing lower. Yet the base was still valid, as it did not make a new closing high for the week.

BlackBerry pulled back to support at the 10-week line for a couple more weeks to complete the pattern. It broke out in the week ended Dec. 26, rocketing 52% in massive volume.

It's important to note that flat-base patterns shorter than five weeks are not long enough to shake out uncommitted investors, making them risky.

Flat bases can show some variation. Some stocks encounter frequent resistance at a price slightly below the prior high. This sometimes occurs with longer flat bases and can yield a lower buy point. Leaderboard highlights such instances.

Don't despair if your stock has broken out of a base and climbed out of range before you had a chance to hit BUY.

In many cases, stocks break out of longer, deeper patterns such as double-bottom or cup-type bases, run up a ways and then go sideways for a bit. This is when flat bases usually take shape, setting the stage for the next leg up.

Flat bases form over at least five weeks, starting from the first down week after a high. They usually feature a correction of 10% to no more than 15% from the highest point in the pattern. A rectangle can typically be drawn around the pattern.

Such tight trading is bullish, especially if it comes during a market correction, because it signals institutional support.

The buy point is 10 cents above the peak of the left side of the pattern, and the breakout should occur in volume that's at least 40% above its 50-day average.

BlackBerry (BBRY) shaped a pair of flat bases in mid- and late 2003, after the stock had suffered through a devastating correction amid the dot-com bust.

The first base started forming in late June that year, after a nice advance followed a breakout from a cup-type base. The buy point was at 23.58. The pattern formed over five weeks and showed a correction of 15%. As such, it was too short and shallow to be a cup with handle or double-bottom base. Both form over at least seven weeks and correct 20% to 30% or more.

In the week ended June 27, the stock fell just 1% as volume jumped higher than average 1. Since the stock finished in the upper half of the weekly price range, the bullish action indicated that institutions were supporting the stock. This is called accumulation.

The breakout came in the week ended Aug. 1, when the stock rocketed 19% in huge volume. After a brief pullback, BlackBerry rode up its 10-week line, doubling in just three months. Then the second flat base formed.

This pattern also showed the tight trading typical of a flat base. This time, the base formed over six weeks and had a correction of 13%. It wasn't a classic flat base, as the stock briefly topped the buy point in the fourth week before reversing lower. Yet the base was still valid, as it did not make a new closing high for the week.

BlackBerry pulled back to support at the 10-week line for a couple more weeks to complete the pattern. It broke out in the week ended Dec. 26, rocketing 52% in massive volume.

It's important to note that flat-base patterns shorter than five weeks are not long enough to shake out uncommitted investors, making them risky.

Flat bases can show some variation. Some stocks encounter frequent resistance at a price slightly below the prior high. This sometimes occurs with longer flat bases and can yield a lower buy point. Leaderboard highlights such instances.

See Also

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